P2P creates two problems that micropayments seem ideally
suited to solve. The first is the need to reward creators of text,
graphics, music or video without the overhead of publishing middlemen
or the necessity to charge high prices. The success of music-sharing
systems such as Napster and Audiogalaxy, and the growth of more general
platforms for file sharing such as Gnutella, Freenet and AIMster, make
this problem urgent.

The other, more general P2P problem micropayments seem to solve is the
need for efficient markets. Proponents believe that micropayments are
ideal not just for paying artists and musicians, but for providers of
any resource - spare cycles, spare disk space, and so on. Accordingly, micropayments are a necessary precondition for the efficient use of
distributed resources.

Jakob Nielsen, in his essay The Case for Micropayments writes, "I
predict that most sites that are not financed through traditional
product sales will move to micropayments in less than two years,"
and Nicholas Negroponte makes an even shorter-term prediction: "You're
going to see within the next year an extraordinary movement on the Web
of systems for micropayment ... ." He goes on to predict
micropayment revenues in the tens or hundreds of billions of dollars.

Alas for micropayments, both of these predictions were made in
1998. (In 1999, Nielsen reiterated his position, saying, "I now finally
believe that the first wave of micropayment services will hit in
2000.") And here it is, the end of 2000. Not only did we not get
the flying cars, we didn't get micropayments either. What happened?

Micropayments: An Idea Whose Time Has Gone

Micropayment systems have not failed because of poor implementation;
they have failed because they are a bad idea. Furthermore,
since their weakness is systemic, they will continue to fail in the
future.

Proponents of micropayments often argue that the real world
demonstrates user acceptance: Micropayments are used in a
number of household utilities such as electricity, gas, and most
germanely telecom services like long distance.

These arguments run aground on the historical record. There have been
a number of attempts to implement micropayments, and they have not
caught on in even in a modest fashion - a partial list of floundering
or failed systems includes FirstVirtual, Cybercoin, Millicent,
Digicash, Internet Dollar, Pay2See, MicroMint and Cybercent. If there
was going to be broad user support, we would have seen some glimmer of
it by now.

Furthermore, businesses like the gas company and the phone company that
use micropayments offline share one characteristic: They are all
monopolies or cartels. In situations where there is real competition,
providers are usually forced to drop "pay as you go" schemes in
response to user preference, because if they don't, anyone who can
offer flat-rate pricing becomes the market leader. (See sidebar: "Simplicity in pricing.")

"There are repeating patterns in the histories of communication
technologies, including ordinary mail, the telegraph, the telephone,
and the Internet. In particular, the typical story for each service is
that quality rises, prices decrease, and usage increases to produce
increased total revenues. At the same time, prices become simpler.

"The historical analogies of this paper suggest that the Internet will
evolve in a similar way, towards simplicity. The schemes that aim to
provide differentiated service levels and sophisticated pricing
schemes are unlikely to be widely adopted."

Why have micropayments failed? There's a short answer and a long one.
The short answer captures micropayment's fatal weakness; the long
one just provides additional detail.

The Short Answer for Why Micropayments Fail

Users hate them.

The Long Answer for Why Micropayments Fail

Why does it matter that users hate micropayments? Because users are
the ones with the money, and micropayments do not take user
preferences into account.

In particular, users want predictable and simple pricing. Micropayments,
meanwhile, waste the users' mental effort in order to conserve cheap
resources, by creating many tiny, unpredictable transactions.
Micropayments thus create in the mind of the user both anxiety and confusion, characteristics that users have not heretofore been known to actively seek out.

Anxiety and the Double-Standard of Decision Making

Many people working on micropayments emphasize the need for simplicity
in the implementation. Indeed, the W3C is working on a micropayment
system embedded within a link itself, an attempt to make the decision
to purchase almost literally a no-brainer.

Embedding the micropayment into the link would seem to take the
intrusiveness of the micropayment to an absolute minimum, but in fact
it creates a double-standard. A transaction can't be worth so much as
to require a decision but worth so little that that decision is
automatic. There is a certain amount of anxiety involved in any
decision to buy, no matter how small, and it derives not from the
interface used or the time required, but from the very act of
deciding.

Micropayments, like all payments, require a comparison: "Is this much
of X worth that much of Y?" There is a minimum mental transaction cost
created by this fact that cannot be optimized away, because the only
transaction a user will be willing to approve with no thought will be
one that costs them nothing, which is no transaction at all.

Thus the anxiety of buying is a permanent feature of micropayment
systems, since economic decisions are made on the margin - not, "Is a
drink worth a dollar?" but, "Is the next drink worth the next dollar?"
Anything that requires the user to approve a transaction
creates this anxiety, no matter what the mechanism for deciding or
paying is.

The desired state for micropayments - "Get the user to authorize
payment without creating any overhead" - can thus never be achieved,
because the anxiety of decision making creates overhead. No
matter how simple the interface is, there will always be transactions
too small to be worth the hassle.

Confusion and the Double-Standard of Value

Even accepting the anxiety of deciding as a permanent feature of
commerce, micropayments would still seem to have an advantage over
larger payments, since the cost of the transaction is so low. Who
could haggle over a penny's worth of content? After all, people
routinely leave extra pennies in a jar by the cashier. Surely amounts
this small makes valuing a micropayment transaction effortless?

Here again micropayments create a double-standard. One cannot tell users
that they need to place a monetary value on something while also
suggesting that the fee charged is functionally zero. This creates confusion - if the message to the user is that paying
a penny for something makes it effectively free, then why isn't it
actually free? Alternatively, if the user is being forced to assent to a
debit, how can they behave as if they are not spending money?

Beneath a certain price, goods or services become harder to value, not
easier, because the X for Y comparison becomes more confusing, not
less. Users have no trouble deciding whether a $1 newspaper is
worthwhile - did it interest you, did it keep you from getting bored,
did reading it let you sound up to date - but how could you decide
whether each part of the newspaper is worth a penny?

Was each of 100 individual stories in the newspaper worth a penny, even
though you didn't read all of them? Was each of the 25 stories you read
worth 4 cents apiece? If you read a story halfway
through, was it worth half what a full story was worth? And so on.

When you disaggregate a newspaper, it becomes harder to value, not
easier. By accepting that different people will find different things
interesting, and by rolling all of those things together, a newspaper
achieves what micropayments cannot: clarity in pricing.

The very micro-ness of micropayments makes them confusing. At the very
least, users will be persistently puzzled over the conflicting
messages of "This is worth so much you have to decide whether to buy
it or not" and "This is worth so little that it has virtually no
cost to you."

Richard Koman's WeblogSupreme Court Decides Unanimously Against Grokster
Updating as we go. Supremes have ruled 9-0 in favor of the studios in MGM v Grokster. But does the decision have wider import? Is it a death knell for tech? It's starting to look like the answer is no.
(Jun 27, 2005)